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Business Finance #05:

Q: My supplier wants a huge deposit. What do I do?

A: Consider a Letter Of Credit.

If you're an importer and your overseas supplier wants a huge deposit before they'll supply the goods, what do you do? Consider a Letter Of Credit.

Suppliers want money up front

If you haven't worked with a supplier before, they'll generally want a significant deposit before they'll start work or send any goods - particularly if they're overseas. This is understandable, but it creates real cash flow problems for most importers. In these situations, a Letter Of Credit is an option.

Letter Of Credit - how it works

A Letter Of Credit is a document that guarantees payment by the Lender to a third party if certain conditions are met. Importantly, it's a way of dealing with your supplier's demands without having to part with any cash up front. Here's how a Letter Of Credit works:

• • Go to an MFAA Member.
  • Through your MFAA Member, you apply to a Lender for a Letter Of Credit.
  • If approved, your Lender will send the Letter Of Credit to your supplier's bank.
  • Your supplier's bank then notifies their client that the Letter Of Credit has been received, and that they can ship the goods with guarantee of payment.
  • You pay your supplier for the goods when you receive them.

Letter Of Credit - a specialist Business Finance product

Letters Of Credit can improve your cash flow. However, they can be expensive and they are a specialist area. Get the foreign exchange arrangements or loan conditions wrong, and it could cost you big time. You need to talk to a Business Finance professional. To learn more about Letters Of Credit, talk to an MFAA member today.

Want another Business Finance tip?

Equity Finance: Venture Capital. Check out Essential #06